The yield curve and the next recession

Get recession-ready by monitoring yields and corporate spreads

Investors who are anxious about the next recession should stay ahead of the curve—the yield curve, that is.

Listen to the full podcast on AdvisorToGo, powered by CIBC.

“The shape of the yield curve is one of the best predictions of recessions,” said Patrick O’Toole, vice-president of global fixed income at CIBC Asset Management. He finds that the bond market is a good predictor of economic growth.

A normal, or steep, yield curve is present when shorter-term rates are low relative to longer-term rates, and that typically indicates economic growth will continue and inflationary pressure will rise. To compensate investors for the potential of rising inflation, longer-term bond yields are generally higher, said O’Toole during a late-August interview.

A normal yield curve is usually followed by a flatter curve, as central banks raise rates in an attempt to ease inflationary pressure.

Action from the central bank “usually means economic growth is around what is considered potential […] without the worry that inflation will accelerate,” said O’Toole, who co-manages the Renaissance Canadian Bond Fund, an underlying fund in the Renaissance Optimal Income Portfolios. “It’s like the goldilocks scenario: the economy and inflation are both running not too hot or not too cool; everything’s just right.”

With a flatter yield curve, investors in long-term bonds also don’t demand higher yields as compensation for inflation risk, he added.

In contrast, an inverse yield curve results when central banks aim to reduce inflation aggressively by raising short-term rates above long-term rates. “When you get that inverse curve, that’s generally been a good indicator that a recession is imminent,” said O’Toole.

Tracking the curve like a pro

To get ahead of a potential inverse curve, O’Toole monitors the yield spread between the three-month Treasury bill and 10-year Treasury bond (research from the Federal Reserve Bank of San Francisco recently called this “the best summary measure” for forecasting a recession).

“When that T-bill yield has gone higher than the bond yield for 10 consecutive days, what we’ve seen in the past is a recession has occurred on average about 310 days later,” O’Toole said, referencing data from the last seven recessions. That average represents a range of between roughly 100 and 400 days before the recession occurs, giving investors time to prepare, he added.

As of Sept. 10, the spread between the three-month T-bill and 10-year bond was 80 basis points or 0.8%, with a similar spread in Canada. “For now, the bond market isn’t flashing a warning sign about a recession,” said O’Toole.

“But keep in mind that that spread was near 3% at the end of 2013, it was just below 1% at the end of last year, and now it’s at that three-quarters of a per cent or 75 basis points,” he said. “And that’s telling us that growth isn’t expected to stay strong, and that inflation isn’t likely to be a problem.”

While current economic indicators point to signs of a late business cycle—the job market’s expected to slow, there is some inflationary pressure, and mergers and acquisitions activity is ample—business cycles typically end when central banks tighten monetary policy too aggressively, said O’Toole.

“The bond market isn’t overly worried about that yet, where we’re sitting today,” he said.

Bide your time, until it’s time to buy

Still, investors want to know if it’s time to get defensive with corporate bonds.

Corporate spreads, or “that extra yield that investment grade corporate bonds offer over top of Government of Canada bond yields,” have ranged from 1% to 1.5% over the last few years, O’Toole said. In late August, the spread was about 1.15%.

In 2007, before the financial crisis, he said the spread was less than 75 basis points, or 0.75%, while it was more than 400 basis points, or 4%, at the height of the financial crisis in 2008-09.

That historical context makes today’s spread “OK,” said O’Toole. Though corporate bonds aren’t cheap, “the compensation that they offer is fair, given the economic outlook and the risks of default,” he added.

He expects corporate bond returns to continue to beat those of government bonds in the next year, but he cautions investors to temper their expectations. “Don’t expect the same level of outperformance that you’ve seen over the past few years,” he said.

He hasn’t taken a defensive position in his portfolio yet, but he’s reduced risk “somewhat, given we could see some hiccups in the world that could cause flight to quality trade,” he said.

If investors rush to the safety of government bonds as volatility increases, he added, “that would offer an opportunity to us to buy corporate bonds at a cheaper level. We’re going to wait for that opportunity, and make sure we have some ammunition to add if the opportunity does present itself.”

Also, even though a recession isn’t part of his base-case scenario, “there’s no doubt we are late stage in this cycle and the risk is higher today than it was two, three years ago,” he said.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.

How to avoid 4 common mistakes investors are making right now

The late stages of market cycles are particularly difficult for investors to navigate. We share our market views and investment insights to help keep your investment plans (and focus) moving forward, and leave the mistakes in the rear-view mirror.

Key investment strategies for late-stage market cycle investing:

  • Decrease equity overweight positions and don’t abandon fixed income positions
  • Shift toward lower volatility, actively-managed solutions
  • Reduce high-risk credit exposure and focus fixed-income selection on high-quality credit positions
  • If you have near-term income needs (i.e. 3 years or less), de-risk a portion of your portfolio into cash

From underestimating equity risks and ignoring the benefits of active management, to stretching for yield in risky fixed income instruments and chasing performance because ‘this time’ is different; mistakes are being made that could hamper near and long-term investment plans.

Here’s how you can recognize, and more importantly avoid, four common mistakes investors are making right now – even in difficult market conditions.

1. Remember what’s normal


Underestimating equity market risk

Low volatility, high returns – who doesn’t like that? Unfortunately, by definition, double-digit returns and record low measures of volatility are not normal. Markets shift, change, and move through cycles – that’s normal, but easy to forget. Investors can quickly become disenchanted with what they consider lackluster returns in some areas of their portfolio, which can lead them to decrease exposure to these ‘disappointments’ – effectively undoing good diversification strategies by avoiding blue-chip investments and overweighting high-growth, higher risk equities on the hope that the recent past performance will dictate future results.

Warning sign

Investors with equity to fixed income ratios beyond their risk tolerance and outsized portfolio weightings in selected, or higher risk regions of the market, such as emerging markets, US health care and info tech have probably chased good performance. Either that, or they let their portfolio mix drift with strong returns on the assumptions that the same things will keep on working.


Don’t double-down on bets with unrealistic performance expectations just because they’ve had a stellar run recently. As explained in our Opens in a new window2018 Capital Market OutlookOpens a new website in a new window we think it is the right time to position yourself for modest return expectations and align to your time horizon.

2. Re-examine the benefits of active management


Counting on passive investments to be all things all the time

The increased volatility typical of late cycle investing creates specific challenges for passive investment strategies while enhancing the benefits for active portfolio management strategies. At the core of every passive investment strategy is the premise that there will be no selective insight, or tilt for any given company, industry, sector or region. Thus passive investment strategies work best in low volatility, upward trending markets, but not in down or sideways markets.

In down markets, passive investments offer no control, stop-gap or interventions to prevent you from bearing the full brunt of market correction pain. They move with the specific market or sector they target. That’s what they are designed to do (i.e. the performance will always be almost as good on the upside, and always slightly worse on the downside). Furthermore, the prevalence of algorithmic and automated sell-triggers in today’s market can exaggerate the speed and force of a sell-off and spark a self-perpetuating tailspin – a frequently quoted factor in February’s market sell-off.

In sideways markets, passive ETF products and index funds offer no potential to select ‘good’ over ‘bad’ investments. You won’t be taking advantage of volatility to buy good stocks on the cheap and take profits in stocks as they rise (generating alpha or excess return in financial speak). To the contrary, by design, passive investing strategies are driven by momentum, increasing exposure to securities that have elevated prices.

Warning sign

Moving assets to passive investment options (eg. ETFs, index funds) on the assumption that returns will always be better than actively managed portfolios.


Don’t discount the benefits of active management strategies. Expertise, contrarian views, the ability to exercise patience and/or pounce on opportunities through active decision making can translate into real value through better returns and/or a smoother ride – benefits we see as well worth it for the current market conditions and outlook.

3. Avoid the temptations of FOMO


Chasing hot performance

The fear of missing out (FOMO) is part of our human psyche. It’s normal and if this is you, you are not alone.

We all love a success story, and it’s fun to be a part of something new and exciting, but investing money that you can’t afford to lose in the latest investment ‘golden-child’ (think hot tech stocks, pot stocks, crypto-currencies and related stocks) means taking on significant risks.

For some time now GLC’s investment professionals have highlighted the risks of stocks whose meteoric stock price rise appears to be based on investor sentiment rather than the company’s ability and outlook to make money and turn a profit (see exhibit 1.0).

Warning sign

Allocating funds that would have otherwise been destined for your core investment strategy into narrow sectors of the market where performance has been particularly hot.


Safeguard your core investment portfolio – the nest egg you’ve worked hard to build. Stick with the foundational pillars of long-term investing and ensure you are diversified by geography, sector and asset class. Excitement is rarely seen as a good thing in investing, so here’s where it’s perfectly okay to be boring! If you want a ‘slush fund’ of ‘extra play money’ to invest in a stock or sector you really believe in, that is just fine to do and can make investing an enjoyable pastime. But when it comes to meeting your overall financial plan, unnecessary risks are just that, unnecessary.

4. Don’t try to be someone you’re not


Taking on more risk than you can handle

As markets roll forward, investors tend to gain a false sense of confidence in their ability to remain comfortable with volatile investment results. These emotions often lead investors to remain overweight riskier assets (including within fixed income investments) well into the late stages of a market cycle.

For some time now, narrowing spreads in credit products (especially high-yield bonds) have offered relief from the headwinds of rising bond yields. As a result, investors may not appreciate the excess risk and volatility that come with high-yield bonds. At this later stage of the market cycle, we believe high yield bond credit spreads have declined to a point where their ability to continue to offer this benefit is limited, and we see the current risk-reward trade-off in high yield bonds as unattractive. In other words, we believe there is little remaining upside, but a significant amount of downside. In a risk-off event when most investors turn to the stability of the fixed income portion of their portfolio to mitigate equity market volatility, high yield bonds will not provide investors with the downside protection that high quality, investment grade bonds will provide.

Safeguard your core investment portfolio – the nest egg you’ve worked hard to build.

Warning sign

Failing to rebalance a portfolio to your appropriate risk tolerance is typically accompanied with having no set plan to avoid suffering outsized losses and the panicked selling of risky positions in the midst of a market correction. Watch for signs you are trying to convince yourself that your tolerance for risk (a mix of your investment time horizon and comfort with swings in your portfolio’s return) is higher than it actually is; typically characterized by talk of ‘letting things run a little longer’, ‘this time will be different’, and ‘if things get bad, I can handle it’.


Reset your portfolio to be at, or approaching, your neutral asset mix based on your time horizon and risk tolerance. Everybody can brush off one or two days of bad markets. But how are you going to feel after a few months or even a year of bad markets? Know the answer to that question, and chances are you’ll know what the right ‘neutral asset mix’ is for you.

What does it mean for you?

Investors at differing life stages will have varying needs and concerns. Consider the following investor scenarios:

1. For those with sufficient time horizon and risk tolerance (i.e. still in the accumulation phase of investing)

Sticking with a more moderate to aggressive, diversified portfolio of equities and fixed income and continuing to add regularly to your portfolio makes sense. You’ll be taking advantage of the lower equity and bond prices that higher yields and market corrections bring, while still mitigating your exposure to any one given market through diversification.

2. Investors on the conservative end of the spectrum

You are most at risk of drifting and/or stretching for income and returns during the late stages of a market cycle – even though you can ill afford to withstand significant declines in capital. With bonds, the challenge of rising yields will create some short term pain but will eventually put the ‘income’ back into fixed income. During this stage of the market cycle we argue that high-quality investment grade government and corporate bonds remain appropriate and a powerful risk mitigation tool, while high-yield bonds (i.e. junk bonds) do not offer this same benefit. Rising bond yields are part of the diet at this late stage of the market cycle, but bond yields will fall when the cycle eventually slows, or ends and high quality bond prices will rise, providing a lift to balanced portfolios that do not abandon these positions.

3. Investors with immediate (less than 3 years) income needs

If you need income from your portfolio to meet immediate lifestyle needs, set aside a comfortable nest-egg of cash in safe, short-term vehicles (like money market or GIC’s). This will allow you to ride out weak bond returns and overall capital market volatility that typically accompanies late-cycle investing. This allows for assets meant for further down the road (3-5 years out and longer) to be kept in a diversified portfolio with some exposure to equities. If equities display late cycle strength, you still have ‘skin in the game’ to benefit and generate growth for your portfolio. In the event of a risk-off scenario, your core fixed income positions are there to help out. Ultimately, this builds flexibility for the future, avoiding the necessity to tap either asset class at a disadvantageous time.

4. All investors

Whatever type of investor you are, if you truly believe that a move up the risk spectrum is appropriate, take incremental steps and examine where you may be taking on excess risk. Shifting your portfolio mix significantly from fixed income to equities and/or domestic to foreign, or from government and investment grade bonds to high-yield, real return and/or floating rate notes, suggests there has been a fundamental change in your time horizon and/or tolerance for risk. Ask yourself if this is really the case – it will help you avoid some of the most common investment mistakes happening right now.

April Market Matters: Active managers can take advantage of market volatility

With current conditions bringing volatility back to the markets, active portfolio managers have an opportunity to buy good stocks at attractive valuations.

Volatility persists, with lots for investors to digest this spring

Market volatility persisted throughout April. The risk of a trade war between the US and China and escalating geopolitical tensions over the situation in Syria were counterbalanced by healthy company earnings growth and inflation levels that, while rising, are doing so gradually. Investors had lots to digest.

Canadian equities respond to stronger oil prices

A rising oil price was the difference maker for the S&P/TSX Composite index as energy stocks finally joined the party and responded strongly with nearly a 7% return for the month. That helped narrow the gap between the performance of the Canadian market and global markets year-to-date, though the Canadian market remains the laggard for now.

Oil prices rose, driving pump prices higher. News that the global economy continues to expand, rumours that OPEC and partners are comfortable with their production caps, production outages in Venezuela, and rising uncertainty over the Iran nuclear deal contributed to a rising price of oil.

Tech companies rebound, yet again

The Canadian info tech sector moved up alongside its US counterparts. Positive earnings releases from some tech-related names built on the momentum for the information technology sector and tech companies in general. Amazon hit a new all-time high after reporting its best revenue growth in more than six years while topping $1 billion in profit for the second straight quarter. Facebook continued to sign up new users (maybe even a few US Congressional representatives) and earned record profits. Facebook advertisers appear to be undeterred by recent controversies around the site’s mishandling of user data. Microsoft and Alphabet also beat earnings estimates, but the latter sold off on concerns around higher capital expenditures. Mega-cap tech names such as these are important drivers of the earnings growth story for the US, and so it provides comfort for investors that the group continues to deliver.

Interest rates (and inflation expectations) push higher

Globally, fixed income markets came under pressure amid rising (or expectations of rising) interest rates, along with some inflation pressure. Canadian government bond yields increased through most of the month, following the lead of U.S. Treasuries. Within the Canadian fixed income market there was a move back towards risk, helping to bring corporate bond spreads in by a couple of basis points. As a result, corporate bonds outperformed their government counterparts for the month.

Important risk mitigation and capital preservation tool

In proportion to your personal risk tolerance, fixed income exposure should not be abandoned. Rather, a well-diversified mix of high-quality investment grade bonds should form a core component of your fixed income portfolio – one that will be rewarded in a risk-off market environment where investor sentiment turns sour for equities. While rising rates pose a headwind for fixed income investments, high-quality bonds remain an important risk mitigation and capital preservation tool.

“Income originates in capital and capital originates in income.” Attributed to Leon Walras, French economist.

An opportunity for active management to shine

We’re continuing to see current market conditions bringing volatility back to the fore. This presents an opportunity for active managers to prove their value. The increased volatility, typical of late cycle investing, can enhance the benefits of active portfolio management strategies while creating specific challenges for passive investment strategies. Active managers have the opportunity to take advantage of volatility to buy good stocks at attractive valuations and take profits in stocks as they rise (generating alpha or excess return in financial speak) – an advantage that is absent within passive investment strategies by design.

At the core of every passive investment strategy is the premise that there will be no selective insight, or tilt for any given company, industry, sector or region. In down markets, passive investments offer no control, stop-gaps or interventions to prevent you from bearing the full brunt of market correction pain. In sideways markets, passive ETF (exchange-traded fund) products and index funds offer no potential to select ‘good’ over ‘bad’ investments.

Active management brings expertise, contrarian views, the ability to exercise patience and/or take advantage of opportunities through active decision making that will translate into real value through better returns and/or a smoother ride – benefits we see as well worth it for the current market conditions and outlook.

2018 Mid-Year Capital Market Outlook: Don’t overreach with aggressive, growth cycle positioning

The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”

William Arthur Ward, American writer (1921-1994)

Time to adjust the sails

The world economy and financial markets continue to progress through the later stage of the business cycle.

This is not the time to overreach with aggressive, growth cycle positioning in an attempt to squeeze out every last drop of the ‘risk-on’ trade, which can put years of rationed, prudent financial planning at risk (see exhibit 1.1). We caution against extrapolating the trends of the past several years in the ‘darling’ sectors – things like emerging markets, information technology, or high yield bonds.

To view the full outlook report with all accompanying sections, tables and charts, please see the attached PDF reports at the bottom of this article.

The late stage of the business cycle is often characterized by heightened volatility, the potential for sharp, short run-ups inequity prices, fast-moving price corrections, and rising bond yields. Any attempt to time each market gyration is a fool’s game.

Although we see continued growth in corporate earnings, we expect the pace of earnings growth to slow. As such, within equities, we recommend broad and diversified geographic and sector allocations – favouring Canadian and US equities over UK and emerging markets, and neutral exposure to Europe and Japan.

Within fixed income we expect yields to move higher and continue to pressure overall bond returns. We anticipate the moves should take some time to unfold (4 to 6 quarters in our view), and will continue with the ‘fits and starts’ type of volatility we have seen thus far in 2018. As with equities, we see opportunities for investors to be selective in how they diversify their fixed income holdings. Given the mix of safety and yield enhancement, we recommend an overweight position in investment grade corporate bonds and alternative fixed income exposure (e.g. mortgages). High yield bonds as a whole do not look attractive to us and we suggest an underweight position. We view the current narrow level of high yield bond spreads (with very limited room for further tightening) and their lack of risk-mitigation characteristics as justification to avoid, or limit high yield bond exposure.

Bottom line: A neutral stance (risk tolerance aligned) is most appropriate for today’s investors. A neutral stance provides exposure to participate in equity market growth without stretching one’s risk tolerance. Our capital market outlook for the second half of 2018 calls for single digit equity price gains. For fixed income investors, we see flat to 1% total returns in the back half of the year.

GLC Outlook Summary

Fixed Income
Fixed income investors face a sideways market as slowly rising (normalizing) yields grind against the time required for higher coupons to make a positive contribution. Active management to navigate the yield curve and pick-up additional yield through credit instruments (e.g. provincials, mortgages and investment grade corporates) provides the opportunity for small, single digit positive gross returns.

Government Bonds
With rising yields, government bonds offer little upside, but their value as a risk-mitigation tool continues to rise the later in the market cycle we go.

Investment Grade Corporate Bonds
We see investment grade corporate bonds as most attractive given their mix of yield pick-up and modest safety. We expect investment grade corporate bonds to outperform governments, with less volatility than high yield bonds. Spreads have limited room for further tightening. Their generally shorter duration and higher running yield is a benefit in arising rate environment.

High yield Corporate Bonds
High yield spreads have moved down and we see very limited room for further tightening. Given the very narrow spread levels and their lack of risk-mitigation characteristics, we see the risk/reward trade-off in high yield as unattractive.

We believe that the global economy has enough momentum, and that inflation and financial conditions will remain accommodative long enough, that our near-term outlook for equities remains constructive. However, we believe we are in the late stage of the market cycle where increased volatility is to be expected and timing is extraordinarily tricky. On a risk-adjusted basis, a neutral stance is most appropriate.

Canada is a favoured market due to its greater sector leverage to global growth and firming commodity prices. Canada’s valuations are more reasonable than their global peers. Trade, debt and sensitivity to higher interest rates remain risks.

We hold a more constructive view on US equities on improved valuations and earnings growth potential, but optimism is moderated by a number of factors: Rising bond yields will continue to weigh on valuation multiples; while we see demand remaining solid, we see a tougher environment ahead for corporate earnings growth as rising borrowing costs, wages and input prices erode profit margins; and finally, trade frictions remain a risk.

We hold a neutral view toward EAFE equities. With Europe (ex-UK) offering solid earnings growth, political risks linger and valuations offer little discount. UK equities are unattractive on earnings growth, valuations and Brexit risks. We hold a neutral view on Japan given muted earnings growth expectations and slowing economic growth in both Japan and China.

Emerging Markets
We recommend an underweight to emerging markets as they face headwinds from a firmer US dollar, global bond yields trending higher and moderating Chinese growth. The risk profile reinforces this underweight, as increased volatility and delicate timing provide incentive to underweight riskier, high-beta assets.

GLC Insights – Trade war threats don’t have to threaten your portfolio

The US government continues to turn up the heat on trade. Understandably, you may be wondering what this means for the economy, the markets, and your investment portfolio.

With trade uncertainty being just one of the risks we see in the later stage of the business cycle, we recommend investors move toward a neutral portfolio position – one that is commensurate to their specific risk tolerance and time horizon. This is particularly true should trade policies threaten to hasten the end of the current bull market run.

Impact on economies versus equities

For now, much of the actual outcomes of the trade rhetoric remain speculation. However, markets don’t like uncertainty, and bouts of short-term ‘trade-related’ market volatility are beginning to appear.

Notwithstanding the near-term fears of tariffs and deconstructed trade agreements like NAFTA, it is important to differentiate the impact to the Canadian economy versus Canadian equities.

Knock-on effects of trade action hurt economic growth, but may have less direct impact on stock values. For example, the tariffs on steel and aluminum will be an economic hit. However, this particular tariff has little direct impact on the Canadian equity market given the S&P/TSX Composite Index has very limited direct exposure of these two industries. Likewise, some of the top contributors to Canada’s index performance year to date (a diverse group that includes Suncor, TD Bank, Shopify, Bombardier, Magna, Waste Connections, and the railways) have significant ties and/or operations in the US. The jobs and investments from these companies will remain welcome in the US, while the benefits of those non-Canadian operations flow back to Canadian shareholders.

Did you know? We estimate 2/3rds of the S&P/TSX Composite index’s earnings are derived from outside of Canada, with the lion’s share coming from the US.

Still, tariff threats and rhetoric cloud business decisions with uncertainty and are taking a toll on business confidence. This in turn can lead to a dampening of business investment – a key component required to extend the current economic expansion.

The lack of business confidence has already hit our Canadian dollar. Recently, the loonie hit a 1-year low. A weak currency is negative for some companies and sectors. However, for the substantial set of companies who derive significant amounts of revenue from outside of Canada, the weaker loonie feeds into higher revenue and all else being equal, stronger earnings growth.

At present the outcomes are uncertain. For now, talk of trade wars is largely based on speculation and posturing.

Did you know? Much of the recent trade news headlines are highlighting the most extreme of speculated outcomes, which few experts consider likely. We have yet to see evidence that these scenarios are based on solid forecasts.

We do agree that angst over trade is creating market volatility. Our base case remains that “cooler” heads will prevail and trade frictions will remain manageable. We do so while acknowledging the reality of President Trump and his administration’s approach to reduce the US trade deficit and be perceived as protecting American jobs. As a result, the prospect of trade wars, or increased protectionist policies, cannot be fully dismissed. Should there be substantial changes to trade agreements, there will be winners and losers. Overall, the net result would be a dampening of economic growth and, as such, a negative for equities and a positive for safe-haven fixed income.

Portfolio positioning

Strategically balancing equity and fixed income holdings aligned with long-term investment goals remains key, while tactically stepping back from the highest-risk components of a portfolio is prudent at this stage of the market cycle.

We believe active portfolio management shines during times of heightened uncertainty. GLC’s portfolio managers are continuously assessing the risks and rewards in their respective markets, aiming to take advantage of market volatility where appropriate and avoiding outsized risks. At GLC, for several months we have been de-risking our asset mix in the balanced portfolios, specifically reducing our exposure to higher risk areas, such as emerging market equities and high yield bonds. Likewise, the suite of asset allocation funds managed by GLC’s Portfolio Solutions Group shifted toward a more neutral position within both equity and fixed income components. These highly sophisticated, actively-managed funds are tailored solutions designed to align with specific risk tolerances, investment needs and time horizons.

Bottom line: We are already late in the business cycle, and trade action is another risk to take into account. As such, this is not the time to overreach with aggressive, growth cycle positioning.

  • Move toward a neutral portfolio position (risk and time horizon aligned);
  • Strategically diversify your assets (within both your equity and fixed income positions); and
  • Maintain long-term thinking.

We see these as key steps to navigating this late stage of the market cycle, and to help guard your portfolio against trade war induced volatility.

GLC’s capital market outlook

For GLC’s market forecasts and to learn more about the factors we see affecting capital markets through to the end of the year, check out GLC’s Mid-Year Capital Market Outlook available on our website.

The Difference between Segregated Funds and Mutual Funds


Segregated Funds and Mutual Funds often have many of the same benefits such as:


  • Both are managed by investment professionals.
  • You can generally redeem your investments and get your current market value at any time.
  • You can use them in your RRSP, RRIF, RESP, RDSP, TFSA or non-registered account.


So what’s the difference? Who offers these products?


  • Segregated Funds: Life Insurance Companies
  • Mutual Funds: Investment Management Firms


Why is this important?


  • Since Segregated funds are offered by life insurance companies, they are individual insurance contracts. Which means….
  • Maturity Guarantees
  • Death Benefit Guarantees
  • Ability to Bypass Probate
  • Potential Creditor Protection
  • Resets
  • Mutual Funds do not have these features.


What are these features?


Maturity and Death Benefit Guarantees mean the insurance company must guarantee at least 75% of the premium paid into the contract for at least 10 years upon maturity or your death.

Resets means you have the ability to reset the maturity and death benefit guarantee at a higher market value of the investment.


Bypass Probate: since you name a beneficiary to receive the proceeds on your death, the proceeds are paid directly to your beneficiary which means it bypasses your estate and can avoid probate fees.

Potential Creditor Protection is available when you name a beneficiary within the family class, there are certain restrictions associated with this.


What are the fees?


  • Segregated Funds: Typically higher fees (MERS)
  • Mutual Funds: Typically lower fees


I can help you decide what makes sense for your financial situation.

2018 Mid-Year Market Review: Volatility makes a comeback

After a remarkably calm period, capital market volatility made a comeback in the first half of 2018; stocks, bonds and currencies were each dealt their fair share.

To view the full report with all accompanying sections, tables and charts, please see the attached PDF report at the bottom of this article.

We’re up. We’re down. We’re up… So now what?

The year began with enthusiasm for global stock markets. Strong corporate earnings and positive economic data helped many indices hit multiple new all-time highs in the first few weeks of 2018, but sentiment shifted quickly. Anxiety over rising bond yields was a key driver for an early-year equity market correction in all major markets.

By March, stock markets settled down. Corporate earnings remained strong, allowing stock prices to rise again, albeit slower, modestly, and with greater volatility.

It has been a wild ride for Canadian bond investors. Trade fears and shifting expectations for the Canadian economy, coupled with rising inflation, resulted in significant intra-period moves – twice the index dropped more than 1.5%, each time recovering by 1.75% and 2.37% respectively.

Ultimately, the bull market run remained intact.

Canadian equities and bonds eked out a mildly positive return.

  • US equities produced modest year-to-date gains.
  • International equities were modestly negative on a local currency basis, but Canadian investor returns got a currency boost from a weak loonie.

Canadian Equities
Not (yet) getting the love we deserve

Sentiment toward Canadian equities remained generally weak. Concerns over trade issues, weak domestic energy prices and highly levered consumers facing heightened borrowing costs and tighter mortgage rules have taken their toll on investors’ view of Canada. The Canadian dollar fell over 4% versus the US dollar.

At a sector level, here’s how the start of 2018 played out:

  • While information technology was the standout sector performer in Canada, it failed to have a significant impact on overall benchmark returns given its relatively small sector weight.
  • The industrial sector carried its weight and then some, as companies with significant foreign revenue gained on the Canadian dollar’s weakness.
  • The energy sector managed a small positive gain (finally pushing through some of the negative sentiment with gains in Q2), but disappointed by significantly lagging the gains made by oil prices. Canadian oil producers suffered from wider and more volatile oil price differentials (Western Canadian Select vs. US WTI) due to a lack of pipeline access, while natural gas-weighted producers continued to suffer from weak Canadian natural gas prices.
  • The heavy-weight financials sector lagged as concerns over a slowing domestic housing market outweighed solid financial results for the banks.
  • Interest rate sensitive sectors utilities and telecom were notably weak, suffering from the rise in North American bond yields.

US Equities
FAANG-tastic, again!

Despite a brief hiccup in momentum during the first quarter, mega-cap tech stocks continued to lead the S&P 500. All of the FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) produced solid returns, led by Netflix’s remarkable 104% YTD return. Meanwhile, rising bond yields weighed on the defensive, yield-oriented sectors, such as telecom and consumer staples.

Two US benchmark indices stood out: the NASDAQ led gains, benefitting from its large tech weighting; and, after lagging throughout much of 2017, US small caps (Russell 2000 Index) outperformed large caps. The market is recognizing that smaller, domestically-focused US companies are somewhat insulated from trade and currency volatility, benefit from tax reform, and are mostly levered to a strong US economy.

Did you know?

The S&P 500 bull market sits at 111 months old and is the second longest on record.

International Equities
Modest markets and volatile politics

Some moderation in economic growth and continued political tensions weighed on European equity markets during the period.

  • Italy struggled to form a government and finally did, but not before eliciting fears of a euro-crisis/Brexit redux and uncertainty/skepticism over potential fiscal plans.
  • UK equities were weak, despite some positive progress on Brexit negotiations, where an initial agreement was struck on the terms of a transition period.

A strengthening Japanese yen was a headwind for Japanese equities, hurting competitiveness for the Nikkei’s heavy weighting in export firms.

After strong returns in 2016 and 2017, emerging markets (EM) have lagged in 2018. EM has been weighed down by tighter global liquidity (stemming from higher US interest rates and US dollar appreciation), and signs of a moderation in economic growth in China, Europe and Japan. Furthermore, political and currency turbulence in regions such as Turkey, Argentina and Brazil shook investor confidence.

Fixed Income
A bumpy ride

The FTSE TMX Canada Universe Bond Index produced a positive total return for the first half of 2018, but bond investors endured a high degree of market volatility. A shifting ‘risk-on’ versus ‘risk-off’ narrative resulted in significant intra-period moves; twice dropping more than 1.5% before recovering into positive territory. During the second quarter, the 10-year Government of Canada bond yield popped above 2.5% (the highest level in four years), but later retreated on global trade fears, returning the FTSE TMX Canada Universe Bond Index to positive territory. US 10-year bond yields broke above 3.0% during the period, but ultimately finished the quarter at 2.86%, 46 bps higher than where they started the year. When all was said and done, long-term bonds shone brighter than shorter term bonds, and corporate bonds bested their government peers. High-yield bonds and investment grade corporate bonds benefitted from their higher running yield as credit spreads oscillated, but ended largely unchanged.

The Notables

A number of events moved markets and drew headlines in the first half of 2018:

Central bank action

Cheap money has been a hallmark of the current bull market and the sharp stock market correction early in the year was a clear sign that investors were hoping for more time with the punchbowl still at the party. The market response gave central banks pause, but most major central banks are moving forward on their rate normalization plans (i.e. rate hikes).

The US Federal Reserve (Fed) raised interest rates twice by 0.25% and continues to signal that further quarterly rate hikes are in the offing. The Bank of Canada (BoC) hiked rates 0.25% in January and is also signaling further rate hikes. Concerns over trade and household indebtedness have led to expectations that the BoC will lag the Fed in terms of further hikes. Recognizing the decent but moderating growth backdrop, and with inflation remaining below target, the European Central Bank announced that it would exit from its asset purchase program in December 2018 but leave interest rates on hold until the summer of 2019.


Trade uncertainty came to the forefront after President Trump announced the US would impose tariffs on steel and aluminum imports. The targeted countries responded with retaliatory tariffs on an array of US goods. NAFTA negotiations continue but with large differences remaining, especially over automobiles. It now looks like NAFTA negotiations may continue into 2019. Additionally, the US and China entered into a tit-for-tat match of proposed tariffs on a broad array of goods, leaving investors concerned about the potential negative effects that an escalating trade war could have on global economic growth. The trade uncertainty weighed on most equity markets and brought global bond yields down from their Q1 highs.

Stock valuations

Price-to-earnings ratios (P/E) have contracted since the beginning of the year on the back of solid earnings. Many companies are exceeding expectations and raising forward guidance, resulting in upward revisions to consensus earnings’ estimates. The strength in earnings growth is being led by the US, where earnings are being boosted by tax cuts, reduced regulatory burden and fiscal spending.

2018 Mid-Year Capital Market Outlook

Time to adjust the sails

There are plenty of signs to suggest we are in the later stage of the business cycle; a period often characterized by heightened volatility, the potential for sharp, short run-ups in equity prices, fast-moving price corrections, and rising bond yields. We do not believe this is a time to overreach with aggressive, growth cycle positioning in an attempt to squeeze out every last drop of the ‘risk-on’ trade. We caution against extrapolating trends in the current ‘shining star’ performers (e.g. information technology, or high yield bonds).

While we see continued growth in corporate earnings, we expect the pace of earnings growth to slow. Within fixed income, we expect yields to move higher and continue to pressure overall bond returns, but at this stage we feel the attraction of fixed income as a risk-mitigation tool has, and continues to, increase.

Our capital market outlook for the second half of 2018 calls for single digit equity price gains. For fixed income investors, we see flat to 1% total returns in the back half of the year. We recommend a neutral stance (risk tolerance aligned) as most appropriate for today’s investors. A neutral stance provides exposure to participate in equity market growth without stretching one’s risk tolerance. For more on what capital markets may hold for the remainder of 2018 and beyond, please see GLC’s 2018 Mid-Year Capital Market Outlook.Open

2018 Federal Budget Highlights for Families

Several key changes relating to personal financial arrangements are covered in the Canadian government’s 2018 federal budget, which could affect the finances of you and your family. Below are some of the most significant changes to be aware of:


Parental Leave

The government is creating a new five-week “use-it-or-lose-it” incentive for new fathers to take parental leave. This would increase the EI parental leave to 40 weeks (maximum) when the second parent agrees to take at least 5 weeks off. Effective June 2019, couples who opt for extended parental leave of 18 months, the second parent can take up to 8 additional weeks, at 33% of their income.


Gender Equality

The government aims to reduce the gender wage gap by 2.7% for public servants and 2.6% in the federal private sector. The aim is to ensure that men and women receive the same pay for equal work. They have also announced increased funding for female entrepreneurs.



Effective for 2021 tax filings, the government will require reporting for certain trusts to provide information to provide information on identities of all trustees, beneficiaries, settlors of the trust and each person that has the ability to exert control over the trust.


Registered Disability Savings Plan holders

The budget proposes to extend to 2023 the current temporary measure whereby a family member such as a spouse or parent can hold an RDSP plan on behalf of an adult with reduced capacity.


If you would like more information, please don’t hesitate to contact us.

2018 Federal Budget Highlights for Business

The government’s 2018 federal budget focuses on a number of tax tightening measures for business owners. It introduces a new regime for holding passive investments inside a Canadian Controlled Private Corporation (CCPC). (Previously proposed in July 2017.)

Here are the highlights:

Small Business Tax Rate Reduction Confirmed

Lower small business tax rate from 10% (from 10.5%), effective January 1, 2018 and to 9% effective January 1, 2019.

Limiting Access to the Small Business Tax Rate

A key objective of the budget is to decrease the small business limit for CCPCs with a set threshold of income generated from passive investments. This will apply to CCPCs with between $50,000 and $150,000 of investment income. It reduces the small business deduction by $5 for each $1 of investment income which falls over the threshold of $50,000. This new ­regulation will go hand in hand with the current business limit reduction for taxable capital.

Limiting access to refundable taxes

Another important feature of the budget is to reduce the tax advantages that CCPCs can gain to access refundable taxes on the distribution of dividends. Currently, a corporation can receive a refundable dividend tax on hand (known as a RDTOH) when they pay a particular dividend, whereas the new proposals aim to permit such a refund only where a private corporation pays non-eligible dividends, though exceptions apply regarding RDTOH deriving from eligible portfolio dividends.

The new RDTOH account referred to “eligible RDTOH” will be tracked under Part IV of the Income Tax Act while the current RDTOH account will be redefined as “non-eligible RDTOH” and will be tracked under Part I of the Income Tax Act. This means when a corporation pays non-eligible dividends, it’s required to obtain a refund from its non-eligible RDTOH account before it obtains a refund from its eligible RDTOH account.

Health and welfare trusts

The budget states that it will end the Health and Welfare Trust tax regime and transition it to Employee Life and Health Trusts. The current tax position of Health and Welfare Trusts are linked to the administrative rules as stated by the CRA, but the income Tax Act includes specific rules relating to the Employee Life and Heath Trusts which are similar. The budget will simplify this arrangement to have one set of rules across both arrangements.